Avoiding Pitfalls In Family Businesses

I've been working with family businesses for 47 years, which is quite a feat considering the fact that I'm only 51 years old. I started when I helped drive some nails on the roof of our new home that my father's construction company was building. My involvement continued as I got my driver's license and went to wor

I've been working with family businesses for 47 years, which is quite a feat considering the fact that I'm only 51 years old. I started when I helped drive some nails on the roof of our new home that my father's construction company was building. My involvement continued as I got my driver's license and went to work running errands and doing basic things such as carrying lumber, digging ditches and working with concrete. As I grew up and worked in the summer, I fondly remember the long drives with my father in his new truck to do a job near Kings Island in Mason, Ohio. The remodeling of a farmhouse turned into a near demolition and complete reconstruction. My father shared his vision, his frustrations, and most importantly, his integrity by example during those summer months. He wanted me to go to college, which I did; he wanted me to graduate, which I did; he wanted me to get a professional job or occupation, which I did.

Since 1973 I have worked with families and business owners throughout the Midwest in the areas of succession planning, business continuity, wealth creation and wealth conservation. I've not seen it all, but I've seen a lot. The purpose of this column is to point out a number of pitfalls that can be devastating to a family business. In such a business, there are mistakes that can be avoided, including some of the following common ones.

The world has changed. Approximately 40 percent of family businesses have female executives or owners. Don't necessarily make your son the heir, and don't always anoint the eldest. Family business ascension is no longer a ritualistic right. Put a process in place that assures you will have the right person ready to take over.

Don't be a family business. Be a business family. Do not pay your family members based on need. Pay them based on results. Set up a system that is reduced to writing, and lay out the specifics of how you get hired, and what you must do before you get hired. Some guidelines are that each hired family member:

  • Must have a college degree. (Four-year undergraduate minimum.)
  • Must complete 3 to 5 years of employment outside of the family business.
  • Must start at an entry level position and learn the business from the ground up.
  • Must agree promotions are earned based on systematic/organized review standards, and pay scales are a function of quotas attained.

Another big mistake is failure to communicate. Oftentimes family members take each other for granted. Seventy percent of lawsuits come from within family businesses, not from the outside.

Some people have a difficult time communicating with others about certain issues. Mix in the dynamics of family, two or three different personality types and spread the ages from 43 to 27: You now have the making of some extremely challenging communication issues. How do you get people to talk about sensitive problems? I think the best way is a family retreat. These retreats can take different forms and can last half a day, 1 day or 2 days. All family members and their spouses should attend. An outside facilitator should be hired to help determine the most important issues. These facilitators have questionnaires that need to be completed so they can target problem areas. There should be some basic ground rules, such as 1) Have an agenda; 2) Make no personal attacks; 3) Clarify, clarify and clarify; and finally, 4) Keep on track. Everyone is responsible.

Once a good family retreat has been completed, you should have 1) a mission statement, 2) clarity of values and purpose, 3) clearly defined roles, 4) knowledge of strengths and weaknesses and 5) a strategic plan that will take you into the future.

If you attempt to retrofit your communications during the heat of the business day without getting away to a hotel or some special place miles away, you will have communication problems that could severely injure your business purpose.

Some questions to ask yourself at the retreat:

  • If someone wants to sell his or her portion of the business, how?
  • Are all family members who meet the basic qualifications guaranteed a job?
  • How do we pick the successor?
  • What is our business now? What is our business 3 years from now?
  • What is the procedure for firing a family member?
  • How do we grow the business?
  • How do I pass the business to the next generation?
  • What is our corporate responsibility as a good citizen in the community?
  • Do we have a sabbatical policy?
  • What is our policy concerning continuing education?
  • How do we structure our pay scale, bonuses and other executive perks for nonfamily members in order to retain them?

Procrastination probably causes as many problems in family business as any one area. Some examples:

  • Dad or Mom doesn't know how or who to pick as a successor.
  • The parents don't know how to put a real and correct value on the business.
  • The parents aren't sure how to be fair if there are children in and out of the business.
  • If Dad or Mom hasn't saved enough for retirement, they are often afraid to let go and turn it over to the kids. What if they "run it into the ground?" Some are afraid that if they retire, boredom will set in. Most of us know three or four people who retired and died within too short a period of time.
  • The parents avoid setting a date to retire.

You get the idea. Everyone wants to go to heaven but nobody wants to die. Take these concepts and break them down one at a time with a trusted advisor. This process will get you moving toward a solution. Be proactive and look for answers; you will find them if you try.

Motivational speaker J. Douglas Edwards often talks about bringing some outside help in three or four times each year. Preferably, this should be a board of advisors. Pay them well! Get people who do not have a position to protect, who are bigger than you, and who have already gone where you want to go. Listen to them and brainstorm. Think out of the box and you will not be victim to the same old thought processes and ideas.

Going it alone: This sort of ties into the above. You cannot operate a successful business on an island. As the following examples show, seek good counsel, and surround yourself with competent advisors who are interested in your success.

  • Have a career mentor, a personal model you befriend who can help coach you.
  • Consider a financial planner.
  • Consider a spiritual advisor.
  • Get a highly qualified insurance broker.
  • Have a high quality accounting firm on your team.
  • Pay for the best legal advice.
  • Have physicians on your team to keep you physically healthy.
  • Take a complete physical at least once a year beginning at age 45.
  • Once you have accumulated $250,000 or more, hire a money manager for your outside investments/401(k).
  • Develop relationships with bankers.

How does your family deal with and process conflict? The smart thing to do is to nip it in the bud before it becomes a fullfledged poison plant. Conflict can be a deenergizing force and, at a minimum, a major distraction. You need a few rules when working on resolving issues. Meet face-to-face. Communication on a oneonone basis doesn't always work when it becomes obvious that the waters are running way too deep.

Give everyone on the family council in attendance an opportunity to present or submit his or her ideas. An agenda is mandatory. Solutions, vision and purpose can be clarified at council meetings.

As you can see, a tremendous amount of time and energy go into keeping the family business ship afloat and in the right body of water. I hope these thoughts will help you realize that with the complete and unequivocal passion that is natural in families, you can persevere, succeed, move on to retirement, and let the next generation prove itself.

Reprinted with permission from The Family Business Report sponsored by the Goering Center at the University of Cincinnati College of Business Administration.